Fresh for 2016
When you become a landlord, one of the first things that you need to sort out is paying tax on your rental income. It’s important to make sure that you’re set up for self-assessment, and that you know which expenses are deductible. Ray Coman, director of London-based accountancy practice Coman & Co., provides a landlord guide to tax returns.
Getting on top of rental property tax
If left too late, the tax bill for your rental property could be a nasty surprise for your cash flow. If you are not already completing a tax return, you need to register for Self Assessment so that the tax position on any rental profits can be properly worked out. It is also important to note that you need to do a tax return even if the property is loss-making. A tax return covers the period to the 5th of April each year, and needs to be filed online by the following 31st January. There are certain expenses that can be deducted from your rental income to leave you with your taxable rental profit.
Most common types of rental income tax deductible expenses
Interest on a loan or mortgage
The interest element of a loan or mortgage used to purchase the rental property can be deducted. The interest can be deducted for all periods that the landlord was seeking to let the property, even if the property was vacant. As interest can be deducted on a loan up to the value of the property when first let, there may be an opportunity to release equity from a property and reduce income subject to tax. This would be particularly effective where a taxpayer has borrowings against their own home.
Property repair costs
You can deduct costs for repairing the property, provided these are not improvements. Property improvements are deducted from gains used to calculate any tax on eventual disposal of the property.
For example, HMRC have specifically stated that the renewal of single glazed windows with double glazing can be deducted from taxable profits.
Wear and tear allowance
As of April 2016, landlords can only claim for the costs of wear and tear that they’ve actually incurred. Unlike the previous rules where you could claim a percentage of your taxable income, you now need to provide itemised receipts in order to claim your wear and tear allowance.
Landlord energy savings allowance
This special allowance can be deducted for draft proofing and insulation costs of up to £1,500 per year. But be quick - the allowance is only available until 5 April 2015.
Mortgage arrangement fees
Mortgage arrangement fees are deductible if paid up front. If added to the cost of the mortgage these are effectively deducted from profits over the life of the loan. Any legal fees are tax deductible on a tenancy agreement for less than one year, or renewal of a lease for less than fifty years. Other conveyance fees are deducted from any gains, which may be subject to capital gains tax on eventual sale of the property.
Accountancy fees for preparing rental accounts and related tax calculations are tax deductible.
Landlord insurance related to the property is also tax deductible.
Tax deduction also applies to running costs, such as telephone and a mileage allowance.
You can also deduct fees not taken on by the tenant such as letting agent fees, light and heating costs, service charges, ground rent, cleaning, and advertising costs.
What happens in case of a rental income loss?
Any losses made on a property should be recorded on a tax return. The loss is carried forward indefinitely and used against the next available profits from the rental business. If the rental business is accumulating losses, there is an opportunity to re-finance. This would be particularly tax efficient where a landlord has other investment income subject to tax.
Rental income tax deductions for live-in landlords
Where only part of a property is let, a reasonable portion of the overall expenses can be deducted from rental profits. An alternative for live-in landlords is to claim a tax relief under the ‘rent-a-room’ scheme. Following the scheme the lower of gross rents received from a lodger and £4,250 can be deducted from rents received. It is advisable to compare the relief with the actual basis in each tax year to decide which would be the most advantageous for saving tax.
Tax treatment for holiday rentals
Landlords who let furnished holiday accommodation may be eligible to use a more favourable tax treatment. The criteria for the scheme are broadly that a holiday property is available for letting for 210 days and actual let for 105, excluding periods let to the same tenant for more than 31 days. The main tax benefit of the scheme is that entrepreneurs' relief is available on the sale, so that proceeds are taxed at 10% rather than say 28%. Furnished holiday letting now includes property within the European Economic Area.
Ray Coman, FCCA, CTA is the director of Coman & Co Ltd accountants, who assist UK landlords and non-resident landlords with both straightforward and complex tax matters. Ray has extensive expertise in property taxation and offers free consultations for new clients.